A Beginner’s Guide To… Credit Cards
So, in this quick guide, we’re going to cover Credit Cards –
You’ve definitely come across them, and heard about all the different benefits, rewards, and advantages of being a card member. You’ve also probably heard of the downsides to misusing the credit you’re borrowing too. In this post we’re going to unpack the fundamentals of what a credit card is (and does), whilst also giving some general advice on how they should be used.
Essentially, a credit card is a special type of card that works differently from other types of card you may find (such as debit, prepaid etc) in that credit cards allow you to use the lender’s money, to buy things – so in effect you’re taking a small (or big) loan for your spending. A couple prime examples of when you may utilise this is when you find that you haven’t got enough of your own cash in your account at that time, or when you wish to make use of the special protections you get when using credit cards (more on that soon).
Credit cards often allow you a month (or sometimes more) to pay them back the full amount you owe interest-free. If you don’t do this, they’ll charge you interest (usually around 20% APR) for each month you fail to repay the month in full. On top of this, if you miss a repayment date you’ll be charged an additional fee by the lender.
These cards are usually tailored to your own pre-existing credit score, with a credit limit being set determined by your credit history and past spending behaviour. The amount of credit the lender will offer you, and the rate of interest they demand, is set as a direct reflection of their belief in you to pay it back on time.
You’ll also find different types of credit card, with some offering more rewards, some offering more generous payment terms, and others aimed at winning over customers from other banks, offering a ‘balance-transfer’ – the ability to use one card’s credit to pay off another in order to get a better interest rate or to ‘reset’ your interest-free window.
Now, a key reason to make purchases with a credit card is that they offer insurances and protections for nearly all purchases over £100 and up to a maximum of £30,000. This is good for making your larger spendings relatively risk-free, as should anything happen to the business that’s taken your money, you’ll more than likely get it back.
Now, for some crucial advice and warnings:
- As a general rule, NEVER take out cash from an ATM on your credit card, this may reflect badly on your credit score, and is generally a bad habit to maintain.
- A credit card is a practical tool if used appropriately and responsibly. Only use it for purchases you know that you can afford to repay. If you misuse your card you may well end up overpaying a lot more than you intended to spend initially, especially for larger purchases which might take time to pay back.
- Make sure you are aware of any charges, fee, or additional payments that may be incurred when using your credit card.
- Keep looking for better deals, as it often pays to move credit lender due to their new-customer offers. When doing this it is generally bad practice to close your previous credit account, as this could damage your credit score.
This post is a supplementary piece to our wider series on all things credit. If you’re interested in learning more about what impacts and shapes your credit score, our article on that very topic can be found here. Alternatively, if you’re just looking for pointers on actually improving your credit score, follow this link here.